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Dear Reader,
Why did Fitch Ratings downgrade US sovereign debt from AAA to AA+? The key reason is in this line from the Fitch commentary: “We expect the general government (GG) deficit to rise to 6.3 percent of GDP in 2023, from 3.7 percent in 2022, reflecting cyclically weaker federal revenues, new spending initiatives and a higher interest burden.” What’s more, the rating agency said, “Fitch does not expect any further substantive fiscal consolidation measures ahead of the November 2024 elections.” The downgrade led to an immediate spike in US long-term yields on concerns of higher borrowing, which in turn led to a sell-off in the equity markets.
Our columnist Subir Roy echoed the mainstream sentiment when he headlined his piece, ‘US credit rating downgrade no big deal’ — the markets have no love lost for rating agencies. This story too said the hit to investor sentiment is likely to be limited. But my colleague Aparna Iyer cautioned that the US can no longer afford to blithely print its way out of trouble.
Here’s a view from the Federal Reserve Bank of St Louis, in a paper titled ‘Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements’ that should rattle the soft-landing crowd. It says, “As the result of the high current US government debt-to-GDP ratio and continuing projected deficits, we face a possible dollar inflation uncertainty nightmare: Continuing deficits, if unchecked, eventually will lead to a fiscal dominance problem… A significant rise in long-run real interest rates also seems quite possible… leading to a messy monetisation in the US, with ramifications worldwide.”
That brings us to billionaire investor and Ray Dalio’s latest post on linkedin.com in which he makes the point that the build-up of government debt in the US is the result of the handouts given during the pandemic. The upshot, says Dalio, is: “This made the private sector relatively insensitive to the Fed’s very rapid tightening to a more normal monetary policy. As a result of this coordinated government manoeuvre, the household sector’s balance sheets and income statements are in good shape while the government’s are in bad shape.” Simply put, the resilience of the US economy to the Fed’s rate hikes and the deterioration of US government finances pointed out by Fitch are two sides of the same coin. What the Fed proposes, fiscal policy disposes. It is also likely that this is what has kept the equity markets high and financial conditions loose. Dalio says that if the fiscal situation doesn’t get out of hand, “a period of tolerably slow growth and tolerably high inflation (a mild stagflation) is most likely”. That global economic growth is easing at the beginning of the third quarter of 2023 is seen from the JPMorgan Global Composite PMI, which fell to 51.7 in July from 52.7 in June.
With the supply of US Treasuries increasing on the one hand and with the Fed’s quantitative tightening on the other, bond prices should fall and the upward pressure on bond yields should continue. This FT story, free to read for Moneycontrol Pro subscribers, says the bond market is now facing one of its biggest tests in generations. The story has loads of information, including this gem: “Ian Fleming chose the name Bond for his spy because he thought it was ‘the dullest name I’ve ever heard’.”
The other big story, albeit a continuing saga, is about the increasingly frantic attempts by the Chinese leadership to prop up the economy. This FT article exhorts Beijing to start spending so that the problem does not become a crisis. The Chinese authorities are laying out the red carpet for investors once again. On Tuesday, Xinhua reported that the country unveiled 28 detailed measures to be applied in the near future, ranging from fair market access to stronger financial support and better government services, to tackle problems that private enterprises are facing, and stimulate the development of the private economy. Chinese cities have started launching property support measures. Time to buy Alibaba, down 68 percent from its peak?
But there are still plenty of questions hanging over the Chinese economy, which is why the response of the Chinese equity markets has been underwhelming. The legendary Richard Koo, who coined the term ‘balance sheet recession’ during the Global Financial Crisis, has said China too could be facing such a crisis, similar to the Japanese malaise, thanks to its borrowing spree. The Chinese government is trying to get back animal spirits of both businesses and households by signalling policy support and by trying to restore confidence badly dented by Xi’s earlier crackdown on businesses. What is needed, though, is a much more forceful approach.
Back home, before the Monetary Policy Committee meets next week, the India Composite PMI shows very strong growth momentum coupled with muted core price pressures — in other words, economic Nirvana. But there are some worries, such as from oil prices, which have moved up. Our Monsoon Watch discerns an output risk brewing for the Rabi season; the continuing demand for work under the rural employment guarantee scheme indicates distress at the bottom of the pyramid; there is trouble in the commercial realty space; and the auto numbers hit the skids in July.
The question, as always, is: what should investors do? While this article warns against blindly following foreign portfolio investors, our columnist Ajay Bagga writes, “On stocks, a combination of high quality, low leverage, high ROI stocks for the major portion of the portfolio and a smaller portion in high growth stocks that have led the markets higher may be an optimal strategy going into the year end.”
Cheers,
Manas Chakravarty
Here are some of the other stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets:
Stocks
Concord Biotech IPO, Nazara Technologies, DCB Bank, Airtel, Eicher, Dabur India, SBFC Finance IPO, IndiGo, Titan, UPL, Maruti, Heritage Foods, GAIL, Weekly tactical pick, Sun Pharma, Thermax, Mahindra Finance, Nocil, Control Print, Escorts, Star Health Insurance, Navin Fluorine, HG Infra Engineering, PVR INOX, Marico, KPIT, Syngene, Coromandel International, Bharat Electronics
Markets
Reading charts alone won’t make you a good trader
In the Money: Single legged option strategies
Direct listing on GIFT City could open Pandora’s Box for Indian exchanges
Personal Finance
Gilt Funds—is it time to jump on to the roller coaster
Motilal Oswal AMC proposes merger of two schemes—what should you do?
Why ESG is a crucial investment despite the sceptics
Companies and industry
What Maruti’s buyout of Suzuki’s Gujarat plant means for shareholders
Why Dr Lal Pathlabs’ fat profit margins bring no cheer
Big 4 IT stocks yet to catch up with mid-sized peers
Praj Industries
PGCIL’s tender pipeline underscores capex revival in power transmission
What’s driving M&M buying a stake in RBL Bank
Global container shipping in for prolonged downcycle
Monetising of HAM road assets gains visibility
How the Tata group’s mineral water brand outshone its salt business
IDFC First Bank
India’s warehousing and logistics sector is in the midst of a boom
What record plant availability at NTPC tells us about the power sector
Global steel output declines by 1.2 percent sequentially
Financial Times
AI frenzy tests Big Tech’s new found cost discipline
Investors turn gloomy over Europe’s economic outlook
Market optimism about convergence in the global economy is overdone
What’s wrong with tech giants riding the AI wave
Economy
India an upper-middle economy by 2030?
India’s services exports to the rescue
Credit growth is casting its net wide
Pro Economic Tracker
PMI numbers show Indian manufacturing one of the star performers globally
The Green Pivot
Climate Action: Wait for breakthrough lengthens
Green capex plans of NTPC, Power Grid look too ambitious
Autonomous electric vehicles have the potential to reshape economy
Policy
Maharashtra legalising leasing of agricultural land a major reform
Digital Data Protection Bill: Too little, too opaque and too late
Forest Bill—Missing the forest for the trees
The government hurdle to government statistics
Startups and tech
India needs more than govt funding to become chip-making hub: Chip War author Chris Miller
How Ethereum co-founder Vitalik Buterin’s ‘joke coins’ helped Sandeep Nailwal build a $213-mn initiative
Build locally, win globally
Corporate governance lapses at start-ups prompt LPs to opt for direct investments
TCS CEO Krithivasan’s new operating structure gets mixed response
Geopolitics and Geo-economics
The Eastern Window: The disappearance of the Chinese foreign minister
Why Vietnam is a destination of choice for global FDI
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